1. BUSINESS
STRUCTURES
AND TAXES
March 7, 2013 Legal and Tax Considerations

2. What are your goals?
 Ease of operation  Self-Employment
 Transferability tax
 Tax benefits  Fringe Benefits
 Liability protection  Flexibility
 Real Estate Basis

3. Other Considerations
 Life/stage of  Estate planning
business implications
 Sources of capital  Management or
 Inter/intra family control
issues  Termination of
 Taxes business
 Risk management  Multiple entities
 Key Employees

8. Typical Scenario – Top Choice
 Limited Liability Company or S
Corporation
 Flexibility, Tax benefits, taxed at owner
rate
 Multiple Entities
 Equipment and labor pool
 Land
 Livestock

9. When To Choose Other Entity Types
 C Corporation
 Need for control at the top
 Shareholders who would have trouble
with pass-through income
 Special needs shareholders, “stranger”
shareholders
 Limits movements of assets and cash
 WATCH – Dividends are double-taxed.

10. When To Choose Other Entity Types
 Partnership
 Well-suited for short-term project
 Can be adapted or evolved into LLC
 Can be terminated at end of project
 Highest liability issues and joint-partner
risk

11. When To Choose Other Entity Types
 Sole Proprietor
 Greatest liability risk – both business
and personal assets at stake

12. LLC versus S Corp
Structure
Limited Liability Company S Corporation
 Tax free in-and-out  Prevents de-
(mostly) capitalization of
 Easy to change as Corp by young
circumstances owners
change  Stronger mgmt
 Can have many control in officers
layers

13. LLC versus S Corp SE
Tax
Limited Liability Company S Corporation
 GENERAL  Can be exempt from
Members pay SE SE Tax if salaries
Tax are paid to SH
 LIMITED Members
are exempt from SE
Tax
 SOMEONE has to
pay SE Tax

14. LLC and Trusts Land
LLCs and Land Ownership Trusts and Land Ownership
 LLCs – “easy-  Locked in for
in, easy-out” duration of Trust
flexibility  Basis locked at
 Basis locked at formation
formation  Cannot change
 Can change structure
structure at any time  Can protect privacy

15. LLCs and Tax Form
Partnership LLC Corporation LLC
 Pass-through  No pass-through tax
income,  Corps taxed at
depreciation, etc. higher level than
 Humans usually humans
lower tax rate than
corps

16. Entity Structure and Risk Management
 Liability Insurance – adapted for every entity
type, but does not make you “risk-proof”
 Entity structure can either “keep in” or “keep
out” risk
 You cannot insure against your own bad
behavior
 Does not protect against financial liability (bad
debt, bad business decisions, over-extended
credit)

17. Entity Structure and Risk Management
Keep Risk Out Keep Risk In
 Liability for outside  High-risk elements
events limited to (equipment, labor) in
assets in LLC – one LLC
cannot get at your  Liability limited to
personal assets assets in that LLC
 Can protect real
estate from
operational liability

18. Entity Choice and FSA/Farm Program
 No more “3-entity Rule”
 Now – payment limit falls to individual owners
 Critical factor is “active participation” by
owners
 Careful structure of “cash rent” entities
 Watch issues of Seniors and Minors

19. Case Study
Goodacre Farms LLC
A&B Goodacre Farm Management LLC
Goodacre Hogs LLC
Bill & Ann Goodacre
Mary – Tom – Jane

20. Assets
Farm Assets Personal Assets
 1,400 acres owned  $500,000 Savings
ground  $500,000
 1,400 acres rented Retirement
ground Value of Estate (March
2013)
 $2M machinery,
 RE = $ 9.8M
buildings, bins
 Farm EQP = $ 2.0M
 Cash assets = $
1.0M

21. Organizational Structure
• Farm Real • Machinery • Livestock
Goodacre Hogs LLC
A&B Goodacre Farm
Goodacre Farms, LLC
Estate • Labor contracts
• Cash or • Contract • Animal
Share Farming buildings
Rent • Key
Employee

22. Real Estate LLC
• Contract with MGMT LLC
• Liability insulation
• Estate Plan – Ownership to all children
Entity Relationships
Cross
Management LLC Contracts
• Contract Farming
• Production “stake” for sweat equity (Son &
Key Employee
• Liability insulation
Livestock LLC
• Production stake
• Liability insulation from Real Estate

23. Real Estate LLC
• Starting out - Owned by Parents
• Gifted to/inherited by children
• Rental income to owners
• Downside – Basis lock!
Family Relationships
Management LLC
• Starting out - Owned by Parents
• Sweat Equity and gradual “buy in” by farming
child
Livestock LLC
• Opportunity for start-up by Gen 2 (Son)
• Can be co-ownership by parents/son

24. Considerations
 Income tax effect of LLC on off-farm owners
 K-1 and personal tax rate
 Unwelcome complications to Gen 2 taxes
 Issue of locked-in basis for real estate
 Yes, but is that important? Will there be liquidation?
 Estate Tax
 Planning for entity discount
 Minimizing estate taxes in high value real estate
market

25. Farm Entity Structure
 Flexibility is KEY
 Goals suggest structure
 Estate Planning – Will there be an Estate Tax
Risk?
 Transition to Gen 2
 Consideration of on-farm and off-farm children
 Needs of Gen 1, Gen 2 and Gen 3
 Liability protection/insulation of assets

26. Business Structures and Taxes
Questions?
Contact information:
Derek Fisher, Fisher & Associates
Email: derekf@fisheraccounting.net
Miriam Robeson, Attorney at Law
Email: miriamrobeson@lawlatte.com
Website: lawlatte.com